Electricity trade – looking eastwards

THE EU is a major importer of oil and gas from Russia, but trade in electricity between the EU and eastern Europe remains limited. However, increased electricity trade could be good news for ex-Soviet bloc states.

A recent Brussels conference brought together electricity companies, regulators and government officials from across Europe to discuss the liberalisation of electricity markets, not just within the EU, but across the wider continent.

And discussion is sorely needed, given that a basic question remains unanswered: why is regional electricity trade so limited in Europe at present?

Only 2% of all electricity generated in Europe (including the European part of the former USSR) is traded between regional markets. And with the exception of Finland, which imports electricity from Russia, no EU states are involved in direct electricity trade with Commonwealth of Independent States (CIS) countries.

Calls for such trade to develop are growing. Vladimir Djangirov, chief executive of the CIS Electric Power Council, made a strong plea at the conference for a unified electricity market in Europe, allowing eastern producers to increase exports to the West.

This subject also figures in the EU’s energy dialogue with Russia, through which Moscow has underlined its wish to see cooperation with the EU encompass electricity as well as oil and gas.

Expanding the scope for trade in electricity, so the Russians argue, would increase Europe’s supply security, strengthen competition on the EU market, and generate the badly-needed revenue for upgrading Russia’s electricity sector (for which an estimated €200 billion-plus of investments will be needed over the next two decades).

So what are the obstacles to such trade? One is the lack of synchronicity and, in some cases, the insufficient capacity of inter-connectors between CIS and western European transmission networks.

On the regulatory side, domestic electricity markets in eastern Europe are still dominated by state-owned monopolies, which prevent new entrants into their supply areas. This is a major disincentive for potential investors in the power sectors of CIS states, without whose engagement pan-European electricity trade will be unsustainable in the long term.

Liberalisation of domestic markets, an open and transparent investment regime, non-discriminatory access to national networks, and cost-based pricing of electricity are essential if power-sector investments in the CIS are to be attracted on the scale required. Concerns over environmental and safety conditions in CIS electricity industries are another reason why pan-European trade in electricity has been limited.

Some EU states and candidate countries already restrict electricity imports from ‘dirty producers’. But there are also those who see electricity trade rather as a necessary condition for east European countries to improve the safety and environmental record of their electricity industries.

They argue that inter-governmental cooperation aimed at combating cross-border air pollution and phasing out antiquated nuclear generation technology should continue, but without linkage to trade restrictions.

For East-West electricity trade to become a sustainable reality, a common framework is needed to ensure it promotes competitive markets, benefits consumers and producers, and takes account of environmental concerns.

Some countries see the 1994 Energy Charter Treaty (ECT) as a key instrument in this regard, both because of its geographical coverage (its signatories include all the states of Europe) and because its provisions cover trade in all forms of energy, including electricity.

The treaty establishes rules for cooperation based on the principles of open, competitive markets, and grants CIS countries non-discriminatory access rights to EU energy markets on WTO terms. Although originally designed to stimulate oil and gas investments in the former USSR, the ECT also has the potential to become a platform for freer East-West electricity trade.

As enlargement looms and Europe moves ever closer to becoming a vast trade zone, European policymakers need to ensure the supply of electricity – and address the key issue of electricity trade between both sides of the continent.

Ria Kemper is secretary-general of the Energy Charter Secretariat, a Brussels-based organisation devoted to promoting energy cooperation across Europe.